FractalTrader

2015 Big Picture Technicals - multi-part

AMEX:SPY   SPDR S&P 500 ETF
276 13 2
First, on the bearish front:
The channel that has been in force since October 2011, which marked the largest correction since the 2008 bear market, is clearly broken. Neither money flow , nor momentum are showing the capacity to make new highs on this retest. In fact the retest is seemingly unable to even stay above the lower channel, making this a possible failed break, or a partial H&S pattern.
On the bullish front:
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If we start the channel from the June 2010 correction, we can see that the termination of the 2015 correction is equal in length and duration to the 2011 correction, making it a probable wave 4.
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As we continue with this line of thought, we can label the 2 corrections as wave 2 and 4, and that leaves us with wave 5 to consider. Wave 5 will equal wave 1 in length at approx 218.14. So far there are only 2 waves up off the sept 2015 low, which was only a 23.6% correction of the proposed third wave.
Two guidelines for 4th waves are:
Wave 4 will retrace 38.2% of wave 3
Wave 4 will terminate in the area of the 4th wave of one lesser degree
In the case above, the third wave was only retraced 23.6%, which would indicate a very strong bull market if that was truly the termination. On the other hand, the wave does terminate at the level of the prior 4th almost to the penny (see the horizontal red line in the first picture above).
Since 2 guidelines are satisfied (waves 2 and 4 form a nice channel, and 4 terminates in the area of the prior 4th), I'm willing to give the 2015 correction the benefit of the doubt that it could be complete.
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Given the depth of the correction off the most recent high, it's no longer possible to label this pattern as a 5 wave impulse wave. There are 2 clear waves off the 2015 Sept low, so a likely count would be an ABC.
We have fallen well short of the fibonacci target zone for the fifth wave of 218.14 - 220.45.

The possibilities as I see it for this scenario, where we need a final fifth wave:
1. The final fifth wave is developing in corrective mode (ie an ending diagonal), with only 1 wave complete.
2. The 4th wave, which was 2 zigzags so far, is not yet over and another corrective formation is coming (flat, zigzag, or triangle).
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Going back to the big picture for a moment. What happens if we do get new highs and a completed (5)? The entire formation going back to 2009 could be a large ABC, or it could be a 1-2-3. In my opinion it's prudent to plan for the worse, but expect the best. In other words, should prices find support in the area of the prior 4th wave in the next correction, be ready for another rally. Should that 180 area not hold (give or take a couple percent), and prices continue to fall, then move off the 2009 lows could be fully retraced.
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The broader market, as represented by the NYSE, has been unable to take out the trendline of lower highs going back to May. Similarly, the A/D line (bottom), is unable to get back above the long term average.
Slightly more bullish, the year-end rally starting on Dec 18 was able to push up the new high/low ratio back above 30 (blue recovery line), and with corresponding volume confirmation (pink above purple). I say slightly, because both appear to be turning back lower, so we'll see if the conviction holds.
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Sector Rotation
I'm experimenting with a way to view sector rotation as a ratio, using the following formula:
(XLY+XLK+XLI+XLF)/(XLV+XLU+XLP)
Or stated more simply, sectors indicating early bull market strength:
Consumer Discretionary (XLY), Tech (XLK), Industrials (XLI), Financials (XLF)

Divided by defensive sectors, namely:
Health Care (XLV), Utilities (XLV), Consumer Staples (XLP)

If defensive sectors outperform bull market sectors, then there is underlying weakness in the market perhaps not visible in price.

I find it interesting that the ratio has never managed to recapture the 2007 highs. Also, the more recent trend is now making lower highs from 2013.
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Transportation-Utility Ratio
Another ratio I'm experimenting with.
The idea really stems back to Dow Theory.
A healthy economy will have strong transportation. Transportation is represented by components like the railroads and the airlines.
If times are good then consumers buy goods. When there is demand for goods, then there is a need for transportation of goods. Additionally, businesses are willing to send employees on training and business trips requiring travel.
When business outlook is no longer favorable, the first thing to be cut is travel.
The flipside of the equation is utilities. Whether times are good or bad, people need to heat and cool their homes, and they need power. The same goes for businesses. Therefore, utilities become more of a need than a want. Also utilities act much like bonds in that they are a fixed income revenue stream with defensive properties.

So if transportation is doing well relative to utilities, then times are good. If utilities are beginning to outperform transportation, then there are some cracks in the silver lining.
A look at the ratio below shows signs of rolling over. Lows going back to 2014 have been taken out, and the last new high was back in Feb 2015.
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SmallCap-LargeCap Ratio
When SmallCap stocks outperform LargeCap stocks it signals 2 things:
Investors are willing to take a higher degree of risk on stocks on smaller companies that have increased sensitivity to economic conditions.
Smaller companies do well when they are able to raise capital and invest in their business. This is only possible in a healthy economy when banks and investors are willing to take the risk of lending money. Likewise, the best sign of a healthy economy are when small businesses are thriving.
When LargeCap stocks begin to outperform their SmallCap counterparts, it's a sign that investors are no longer willing to take the risk that the company could default, so the money flows to the safer bet.
The ratio made a decade high back in 2008 that has not been taken out in this bull market. That is one concern.
The highs made during this 6 year bull market, the last of which was in 2012, have also not been taken out. That's another concern.
Lastly, the current trend is down, and appears to be set to take out multi-year lows.
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Junk-Treasury Bond Ratio
All the points made in SmallCaps vs LargeCaps apply here, except here we are looking at investor willingness to invest in the debt of high-risk companies vs US Treasuries (safety).
The ratio below, like the SmallCap-LargeCap ratio has not recaptured 2007 levels, and has not only rolled over, but is threatening to retest 2008 levels. A very unhealthy sign.
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good points. to bad Elliott wave international doesn't see it as you drew on your charts. I agree with you. we are still in a wave 4 consolidation. Good job on charts!
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FractalTrader PRO whiteknightmoving
11 months ago
beware of EWI, Frost and Prechter's book on Elliott Wave Theory is the bible for EWT, but dont confuse that with the stuff that comes out of EWI. They sell subscriptions based on fear, and every time there's a down day, it's "see we told you". The markets have been on the verge of a collapse since 2000 if you subscribe to their view. I'll leave the grand super cycle blah blah to them and just worry about what's actionable.
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right now the H&S suggested in the first post could be the scenario playing out
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whiteknightmoving PRO FractalTrader
11 months ago
Nice chart. I see that too. Looks like we'll only see a rebound to about 204 for the right shoulder based on previous support/resistance now. Then we drop lower to what....maybe projected move to 173? Maybe the market is going to make a huge Elliott A-B-C move to complete wave 4. A being the August bottom. B being the November high. C being the projected lows first week of February?
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